Phenomenal rise of India's savings

By Kaushik Basu Professor of economics, Cornell University

India's economy is changing fast

One economic variable that eludes popular attention but is arguably the most important indicator of an economy's long-term health is the savings rate.

A nation's savings rate or investment rate - the two are usually closely aligned - is the fraction of the nation's total income that is saved or invested.

In India, amid all the news of the dogged rise of the nation's foreign currency reserves, the obduracy of inflation, and the waxing and waning of the Sensex (not to mention Shilpa Shetty's moods), what has gone unnoticed is the phenomenal rise of the savings and investment rates.

These now stand at 32% and 34%, respectively.

The savings sprint over the last three years... is the most unexpected and most important change that has occurred in the economy in recent times. Your views on this issue

Through the 1970s and 1980s observers around the world marvelled at the surging growth of the East Asian nations and the fact that each one of them saved more than 30% of their national income.

Since virtually no other nation saved and invested at such high rates, a 30-plus savings rate was considered an exclusively East Asian phenomenon.

Economic theory had long taught us that savings and growth are closely connected. But it is not easy to deliberately raise a nation's savings rate.

Up to the late 1960s India's savings rate remained below 15%. It rose to just over 20% by the late 1970s and thereafter remained between 20% and 24% up until two or three years ago.

The savings sprint over the last three years, which puts India in the East Asian category, is, at the same time, the most unexpected and most important change that has occurred in the economy in recent times.

Unknown cause

It gives reason to believe that the high growth of over 8% per annum of the national income is sustainable.

What caused this change? For the rise that occurred between 1969 and 1979 it is reasonable to hazard that the cause was the founding of the Unit Trust of India in 1964 and the sharp rise in the number of bank branches following the nationalisation of banks in 1969.

Indians are saving more each year

At that time there were around 9,000 branches in India; this rose to over 38,000 by 1981. Ordinary folks, who previously had no place to keep their savings, came out in large numbers to save in units, banks and post offices.

The savings rate rise of the last three years is too recent for us to be sure of the cause.

But some insight can be gleaned from the break-up of the total savings.

Over the last few years, household savings have undergone some changes in composition - people are putting more of their money in financial assets than physical assets.

But aggregate household savings have increased upwards only at a glacial pace.

Interesting things have however happened to the state sector. By the late 1990s the public sector had become a net "dis-saver".

Trustworthy nations

That is, it consumed more than it earned. But it managed to put its house in order by 2003, and now has a small positive savings rate of 2% of the national income.

The real gain, however, has come from the corporate sector, which has doubled its savings rate, from just under 4% in 2001 to over 8% in 2005. Hence, the improvement in aggregate savings in India is probably caused by a combination of better fiscal management and bullishness in the corporate sector.

Unlike stock market indicators or the rate of inflation, the savings rate does not fluctuate too much. Hence, barring some calamitous change, our savings rate should not drop below 30% for some years to come.

But I have another reason for being optimistic. What economists do not realise is that a large part of a nation's economic performance depends on social and cultural factors. Francis Fukuyama had argued that more trustworthy nations tend to do better in the long run.

India is growing economically stronger every year

This stands to reason. One cannot rely on the courts to enforce every contract and every promise. So when we want to offer a business deal or a trade pact, we look for people who are known to be honest and trustworthy.

East Asians are reputed for their trustworthiness; it is not surprising that investment flows into East Asia.

From the point of view of an individual, honesty is partly an in-built trait, but it is also in some measure a matter of choice. If we are interested only in the short run, we would not hesitate to ditch a business partner in order to make a quick buck.

On the other hand, as our horizon becomes longer, we are more willing to forego short-term gains for the sake of long-run reputation. In other words, it is worthwhile for us to make "investments" in our reputation.

Some of the same factors that make us invest and save more, make us want to be more dependable and trustworthy.

I cannot provide statistical evidence for this, but my hunch is that in India both these processes have been set in motion and the high growth that we are witnessing now is an outcome of increases in both these economic and social investments.

This debate is now closed. The following is a selection of comments you sent.

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It seems every person in authority in India is after a bribe. Every government official, from local police to politician/administrator. Let's not forget the Water desalination incident in Tamil Nadu or the "fodder scam" in Bihar. So what is the point in investment, when whatever is invested does not go back into the infrastructure or basic development needs such as education? It all goes towards feeding the politicians.
Sam, USA

India's infrastructure, and its political and social systems, will have to improve if the country is to succeed in the long term. If they are not taken of, there will be risks for the economy which will affect everyone.
Siva Kumar Narayanasamy, London, Uk

Prof Basu is using trustworthiness in a macro economic sense here. He is not talking about the personal trustworthiness of Indians. Moreover, I am disappointed in the number of people of Indian descent who continue to decry any Indian successes with stale disclaimers and pessimistic outlooks. Wake up and smell the progress. No economy flips a switch and suddenly becomes a first world wonder state - the years in between, often forgotten, suppressed perhaps in the collective memory, are often painful and disappointing.
Abhi Jain, USA

Last week while in India, I went to my local bank to open a deposit account. I had to get five different signatures before they would accept my deposit. But I had to wait two hours before getting the fifth signature, as the "Sahib" had gone home for lunch and the bank cannot open an account without his signature. It took over three hours to finish a transaction that takes about 10 minutes in the USA. Makes me wonder how much more money Indian banks could accept if they replaced their outdated ways of functioning!
Jay Singh, USA.

Talking of Indian economics, one vital point people seem to overlook is the stupendous reservoir of gold in most Indian households. Unlike the industrially advanced countries, the craving for an average Indian to hoard gold is phenomenal. The illogical craze for the yellow metal is so astonishing, that an average Indian will go for it even if it means forgoing the essential comforts of living. There is little doubt that even if a fraction of this is brought in to productive investment, it will perform an unprecedented economic miracle.
NG Krishnan, Bangalore, India

I always thought that a spending economy grows and survives better. And my observation with Indians in Germany is that they no longer live frugally and save money to send home. Most Indians I come across today spend a lot - though not on unnecessary things. Most seem to spend their money on travelling - I am astonished at how many Indians there are in all the major cities of Europe. It seems as if everyone living in India is travelling everywhere. As far as trust-worthiness is concerned, it has to be remembered that with more than 1bn people, the percentage of such pick-pocketers and cheaters is proportionately the same as any big city in the world.
Vasudharani, Germany

Nowadays the Indian economy is growing very fast. But the standard of Indian politicians is not always keeping pace. Until more young and well educated people are given the opportunity to participate in politics, it is difficult to see poor people can brought above the poverty level and the country can finally compete alongside developed countries.
Balu , India

While we should not forget that remittances from Non Resident Indians (NRIs) contribute a lot to India's foreign reserves, I do not think they are the reason for India's success story. NRIs have nothing to do with $20bn Vodafone-Hutch telecoms deal or the $11Bn Tata-Corus steel deal. Neither are they responsible for the million plus highly skilled professionals india is churning out every year. I personally think of NRIs as cowards who escaped to greener pastures when it didn't "rain" at home. And when it did, they say "we have created clouds" and "that's why the fields are green". Its time NRIs woke up!
Anil Pahal, India

This article is rot! India is one of the most corrupt nations in the world, and the government and associated bureaucracy are the ring leaders. Our inflation rate has doubled. Has your study factored in the greater availability of money such as the Rupee? People seem to be spending more not less! Housing loans, car loans, shopping malls, coffee day - where a cup costs 20 Rupees - we seem to be following the "American Way" - that of rampant consumerism.
Vivek.M, India

"East Asians are reputed for their trustworthiness...". Really? Are you some sort of La-La Land? India is full of cheats, liars, and scam artists. Maybe you have cleaned up corruption in that country since you seem to be jet-setting every few weeks to India.
[e-mail], Canada

Still socially in India trustworthiness is a dream. May be the trustworthiness on the Enterprise level had gotten better.
Hari, St.Louis, USA

Actually, I was under the opposite impression that although Indians tend to save and invest their income as a rule, in recent times we are starting to see consumers spending money and carrying balances on their credit cards. One reason the savings rate has gone up anyway might be that incomes have increased and despite inflationary pressures, people are simply making more money in proportion to the price of food, housing etc.. so as a result are saving more.
Dwight Kulkarni, Toronto, Canada

Professor Kaushik Basu has brought out a real insight into the process of growth being witnessed by us in our country. The credit for significant growth in saving rate is mainly to be attributed to large number of mutual funds which have come up in the country and which are offering very many avenues of investment to the people to put their hard earned savings there. Various saving schemes offered by government and banks to senior citizens have also contributed to the increase in savings. Of course, the general prosperity brought in by 8/9% growth in economy is also a major cause of increase in savings. The analysis of Professor Basu is welcome as it re-inforces the impression that India's growth story is sustainable and has a strong footing.
ND Chawla, India.

It would be interesting to see if this increase in savings and investment rates can be tied to foreign remittances. The fact I know is that, in last few years, foreign currency remittances of NRIs [non-resident Indians] in an year exceeds Government's total annual income tax revenue. This fact, if true, is a matter of concern. It means that Indian families may be more dependent on an earning member outside, than years earlier when this is not the case. For example, economy of Kerala is known to be quite dependent on money earned by working Keralites in Arab countries. The implications of this dependency is to be seen.
Shaawm, Germany

Hopefully the higher national savings rate is not represented by a small percentage of the population or different for the different social groups within the Indian society (we should not forget India has a closed social system, but would rather be spread across all people and all states). Hopefully wealth is a unifying force in the extremely schizophrenic Indian society.
Navaraj, US/ India

Some interesting changes are happening in India for sure. I am not sure that it is the young that are saving though. I think the generation that is between 33-45 years old now is the one that has seen the greatest leap in real income as well as expectation. They are old enough to remember harder times and not too young to think things were always this good. I am not so sure about the younger set though-there is a lot of spending I witnessed as a casual observer in Bangalore.
Radhika, Canada

Good analysis. Different from usual talk about basic economic factors. However, I am not sure if India is a trustworthy nation. Trustworthy nation attract investment just because you can find a honest partner but also because the quality goods can be better. People with pride in what they are doing - be it cleaning the road or making a toy or stitching garments - will always produce top class product even less supervision. I doubt Indian workers will ever be able to produce the best products mainly because of poor attitude rather than lack of skills or knwoledge. Rajendran
C.S. Rajendran, Thailand

Regarding the comment about trustworthy nations, I think the author has it backwards, nations become more trustworthy as they grow richer. It is easy to be more easygoing when you think that life will be better. Poverty is terrible and makes you do awful things because you want to make things "better" for your loved ones. Movies are full of "heroes" taking the law into their own hands because they get cheated. A richer nation is able to protect its citizens better. Corruption happens because govt workers do not get paid enough. A richer nation will take away that temptation.
Jayant Patel, USA

India and trustworthy? It probably ranks right up there as one of the most untrustworthy places in the world. I've been to India several times and never failed to get ripped off, let down, defrauded, cheated, kidanpped, black-mailed or threatened. Indians love making a quick buck at any expense, greed and corruption and in-grained in Indian culture. And the court system, what a nightmare, you might as well give your life going round in circles. On this basis there should $0 inflows into India.
Anil, UK

I think the days of India's import substitution have made Indians into thrifty people. They used to put their money into real estate and education. With the cost of both now skyrocketing in India, ordinary Indians are "forced" to invest in financial assets. This is something I've observed with my friends at university. Though from wealthy families, they and their families do not spend much. However, they still cannot afford to invest in real estate and other such fixed assets (at least in their home cities of Bangalore, Delhi and Mumbai). I think saving is an important lesson the other nations in the sub-continent can learn from Indians. Pakistanis and Sri Lankans are notorious spendthrifts, with wealthy families putting on a show and a party at any opportunity. However, I do think that Mr Basu is intellectually fishing about the trust issue. India's legal infrastructure needs to improve before the population internalises trust and its cost/benefits.
Anthony Stephens, Sri Lanka

From a public entity standpoint, it wouldn't make sense to have a positive bank balance as it is important to improve the infrastructure to sustain the increased economic activity. Sooner or later capital markets will dump the countries that cannot yield higher returns. Then the issue of trustworthiness becomes irrelevant.
harry , USA

India has taken its first steps in becoming a world leading economic power. The coming 20 years will witness a huge economic growth and an unprecedented increasing consumerism. Having said that, I also believe the investment rate will increase. People will invest more money into the company rather than buying more gold, which has been the usual mode of savings. By buying gold,no extra jobs are created.
Devang Parekh, Sweden

Unfortunately, the resevoire of funds that Indian is stashing away, that is, saving and investing, is unable to benefit the populace. Possibly in the long term the saving may contribute to the nation as a whole, but as anyone who has frequented India knows, the masses themselves are unable to save for their future. Perhaps India's elite can save for the future, but not the masses. Don't let statistics fool you. Until you see nationwide stability, then understand the the needs of the people are met.
Nick Candler, USA

As always Prof Basu has identified one more reason for being optimistic about India. Most of the world is. So am I. "Savings rate" is an important indicator but a few variables may need to be considered to get the realistic picture. India is known for a parallel economy and one needs to analyse how this factor comes to play. The number of tax payers has not grown as much as the economy has grown neither it has kept pace with the "Savings Rate". Similarly the tax collection from non-salaried class still does not seem to be growing at the rate with which economy is growing. Francis Fukuyama's argument that more trustworthy nations tend to do better in the long run may give optimism to Prof Basu but that is precisely the point which may come in our way i.e. Indian's are still not doing enough in gaining the trust of the international community. Still we are far from the acceptable level. We may send a right signal by paying Tax. Let us begin!
Hussain Jasani, India

As an Indian, I am frankly ashamed by the outrageous claims made by Mr Basu. Linking cultural tendencies and generalizing them to form an opinion that he claims as fact is distrubing in this post-modern era. I would go so far as to question how this differs from the negative stereotypes that we are so quick to condemn. I am disappointed that the BBC would allow such an opinionated and unsubstatiated piece of writing into its news.
Johnson Solomon, Canada

I am a bit perplexed. I am not an Economics expert, so I may be wrong. A few counter-questions- 1. Doesn't (consumer) spending a provide a better link to overall economic growth than savings? 2. Isn't Japan's problem precisely this - too much savings and no spending? 3. At 32% and 34% savings and investment rate respectively, are you sure there is no double counting? The preferred method of savings in (middle-class) India today is real estate. Doesn't this count as savings as well as investment? 4. Is it really true that Indians are investing in financial assets? Is real estate a financial asset? 5. Aren't Indian corporates savings more (at 8%) only because there aren't, possibly, enough worthwhile investments, i.e. a resource crunch? (e.g. limitations in expansion due to lack of available skillforce, suitable infrastructure etc.) [Having said that, I am very much a sceptic of consumer spending-driven growth, especially the model followed by the US. One would have to look beyond domestic interest rates to achieve sustained growth in a globalised world.]
Vijay Raman, UK

My hunch is that the current savings rate is higher because most of us are afraid - of any economic downturn - and hence saving more for the 'rainy day'. So, we are all trying to save while we can.
HB, USA

The saving habits in India perhaps have the origin in the unreliable nature of monsoon and the droughts or floods which could follow. Because of this, many Indians believe in frugal living and saving for the proverbial "rainy day". In good times, Indians traditionally tend to spend less than they earn. Thus, if good times persist, one can expect steady growth in saved amounts. However, in the recent years there is a noticeable increase in the use of credit cards and spending more than one earns on luxury goods, which at one time were considered as non-essential by most middle class Indians. With the increased buying and saving power, the economy in India has benefited in two different ways. One is the increased savings Indians of old school. The form of savings has shifted from bank account savings to investment in stock market, bullion, property and mutual funds. Simultaneously, the media blitz has increased the knowledge and yearning of luxury goods in Indian middle class, leading to a spending spree. This has spurred the manufacturing and service industry. What India lacks in is ways and means of maximizing the effective utilization of collected tax, while nabbing the tax evaders. High rate of taxes, coupled with loopholes in tax laws and dubious dealings of many encourage many to cheat on tax. I do not know if there is a measure to compare the of effective utilization of public funds amongst countries. We do have the example in Singapore, where tax rates are low but good utilization is evident in excellent infrastructure and public conveniences. It should be a matter of time when better infrasturcture is finaly available in India to spurr the economic growth further
Sanjay Sood, Bangalore, India

Totally false, look at the peoples in millions who are of peoples who are suffering from poverty, no clean drinking water and even no place to sleep, i dont think it will be fruitful for India to grow by 8 or 9 percent only for 20% eleite peoples
Shewag, Delhi, India

Traditionally, Indian society is well-known for being savings-oriented and is only recently learning consumerism and becoming confident in risk-taking. Instead of investing in gold or land, as is traditional, the increased investment in financial assets is an indication both of better availability of such options and of a society a little more knowledgeable and willing to take risks. It should also indicate a higher earning power as people rise above what they consider as survival level and start putting more into their savings.
Nandini, India

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