Present saving, investment rates not enough to achieve 8% GDP growth: India Ratings

According to India Ratings, in order to boost India's GDP growth, a large part of the investments need to come from infrastructure. This will offset the weakening of external demand caused by global headwinds.

New Delhi: As the Indian economy is coming out of the shadow of the pandemic and the slowdown caused by the Russia-Ukraine war, the Modi government is bent on achieving a higher GDP growth rate. However, economists believe that the present saving and investment rates in the country are not enough to achieve an 8 per cent high GDP growth rate.

According to an analysis carried out by India Ratings and Research, a Fitch Group rating company, getting the economy back to a growth path of over 8 per cent on a year-on-year basis would require bringing both savings and investment rates close to 35 percent whereas the current saving and investment rate in the last financial year were only 30.2 percent and 29.6 percent respectively.

In a statement sent to ETV Bharat, India Ratings said that a large part of the investments will have to be in infrastructure, which the agency believed would help revive private investments by easing supply constraints and offset the weakening of external demand caused by global headwinds.

“Higher investments will have to be accompanied by higher domestic savings to keep the savings - investments gap (as reflected in the current account) under check,” it said. According to the agency’s assessment, while the current focus of the government to step up its capital expenditure on infrastructure appears to be the right step as it was geared towards augmenting the investment rate, commensurate steps to encourage savings in the economy are not visible.

The sovereign rating agency said: “Doing away with various incentives for savings is a move towards simplifying the income tax structure, but this may impact the households’ savings - the mainstay of overall savings in the economy.”

According to the latest official data, India’s GDP growth recovered to 8.7 percent on yearly basis in March 2021 to April 2022 period after contracting by 6.6 percent on a year-on-year basis during the previous financial year (FY 2020-21) when the entire country was under a complete lockdown for several months to contain the spread of the highly contagious virus.

The agency said that the country would be able to achieve a growth rate of 5.9 percent in the next financial year. “These growth rate levels are not enough for India to reap the benefit of demographic dividends,” it said.

According to the rating agency, the age structure of India’s population is such that the labour force will keep growing over the next 20-25 years and therefore to gainfully employ them, the country would require a sustained GDP growth rate of over 8 percent over the next two to three decades.

The growth potential of an economy depends upon a number of factors, the ratio of gross capital formation to GDP also known as the investment rate is widely regarded as critical for achieving sustained high GDP growth, it said.

According to the analysis, when the Indian economy grew rapidly after FY 2003-04 and up to FY 2007-08, it was the period when the investment rate increased significantly. The investment rate rose after FY 2003-04 and it was nearly 40 percent in FY 2010-11 but it has declined since FY 2011-12, although not in a unilinear fashion.

India Ratings said the investment rate fell after FY 2010-11 due to two reasons. Firstly, due to difficulties faced in the implementation of projects, and secondly, due to stagnation in capacity utilization of the manufacturing sector, triggered by weak domestic and external demands.