Trends in Savings, Investment and Consumption

By Pulapre Balakrishnan and M. Suresh Babu

Following the press release ‘Quick estimates of national income, consumption

expenditure, savings and capital formation 2005-06’ on 31 January 2007, the Central
Statistical Organisation released ‘National Accounts Statistics 2007’ in February offering
uptodate estimates of the standard output of national income accounting. In this short
note we aim at a quick review of what these estimates signify.

I. Savings and Investment: The aggregate picture

For the year 2005-6, both savings and investment display a certain vigour, part of a
pattern discernible from the year 2002-3 onwards. This is apparent from Tables 1 and 2
both of which present, for reasons of comparability, these variables as a share of current
GDP at market prices. Note that savings and investment in India are now inching towards
East Asian levels as part of a general strengthening of the macroeconomic environment
of the economy. Savings appear to have definitely broken out of the figure of 23 percent
of GDP around which it has fluctuated1 mildly throughout the nineties. As for
investment, for the year 2005-6 gross domestic capital formation is an impressive 32.2
percent of GDP. With this we are now back in the situation more typical of India
whereby investment exceeds savings, unlike the very early years of this century when
savings exceeded investment implying that India was exporting capital. The one
departure from this comforting picture is the rising inflation rate currently witnessed,
described by some as ‘overheating’ of the economy. If we are to characterize the current
situation overall we would say that it represents an investment boom.
On the estimates themselves, we make two comments. First, the aggregate figure
for domestic capital formation includes ‘valuables’. These are defined as ‘gold,

1
See ‘Economic Survey 2006-7’, p. S-8.

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ornaments and other metals’. In the last two years this item amounts to over one percent
of GDP, close to the figure for the current account deficit in some years. As much of the
gold is imported this gives us an idea of the contents of the very same deficit. Clearly,
little has changed from the time in the first half of the twentieth century when Keynes had
described India as a ‘veritable sink for gold’. Also, the World Gold Council’s concerted
appearance in India of late appears to have paid off! Secondly, ‘Errors and Omissions’,
the factor that is used to reconcile Investment with the finances available for capital
formation – being savings plus the current account balance - continues2 to be large. As
Shetty (2006) has recently highlighted this, and the issue has subsequently been taken up
by Chaudhuri (2006), we do not dwell on it further. We only stress the one point that not
only does its continued presence constitute a source of dissatisfaction regarding the
estimate for gross investment but also we must note that the figure (for E&O) is
particularly large3 over the past two years, being close to 2 percent of GDP in 2004-5.
Nevertheless, we have little doubt that the CSO estimate of investment is faithful to both
the direction and broad magnitude of capital formation in the economy today. We are, no
doubt, witnessing an investment boom in India. We return to this issue below.

II. Savings and Investment: A dis-aggregated view

Data on savings by institutions are also presented in Table 1. The seven-year period for
which data are presented has seen some significant changes. One among these is the
steady decline in the share of savings contributed by the household sector. This is closely
matched by the rising share of the private sector, which can be seen emerging as a major
saver in the economy. But the more interesting development is the re-emergence of
positive saving in the public sector. By now three years old, this trend has been strongly
maintained. Though the figures by themselves are not very large, the emergence of
positive savings in the public sector is an important development, taking us qualitatively
nearer the East Asian experience where governments have been serious contributors to
the growth process by channelling resources into investment. We digress very briefly to
emphasise this point, and to draw out its implications for India.

2
See ‘Economic Survey 2006-7’, p. S-9.
3
See ‘Economic Survey 2006-7’, p. S-9.

2
 In Table 3 are presented data on savings and investment in (South) Korea. While
savings and investment in India are by now clearly in this league one feature yet
distinguishes the Korean position from the Indian. Public savings in Korea has been
consistently high and close to a third of total savings in the economy. Also, the figures for
the past seven years reflect a hallmark of long term-development in Korea, that savings
has mostly exceeded investment, implying that its economy has not depended on foreign
savings. This is useful to bear in mind at a time when there is an evident obsession among
some with replicating the Korean experience (mistakenly, FDI in the context) in India.

Back to the issue of the improvement in public savings in India in recent years, it
can be verified that this follows directly the reduction in the Revenue Deficit following
the enactment of the FRBM Bill in 2002-3. While the aggregated data here cannot be put
to work to establish how the improvement has been brought about even a cursory glance
at the central government’s budget documents showed us that it has been engineered via a
reduction in spending. Though some spending certainly needs to be cut, we believe that it
is equally important to raise revenues via both taxation and an improved performance of
the public enterprises. This is entirely feasible. So used are we to public dissaving by now
that we tend to forget that in the nineteen sixties public savings contributed close to
twenty five percent4 of aggregate savings in the economy. In our view, while there is
much scope for trimming the range of public intervention, such as re-orienting it to
certain segments of the economy, the role of government in contributing to capital
formation remains as significant as ever. We believe, therefore, that a continuing
improvement in public-sector saving is desirable, even though the precise mechanism of
bringing this about may be debated.

Data on capital formation are presented in Table 2. As with savings the household
sector has been somewhat sluggish of late. This finding should not surprise as household
investment is at least partly estimated via the saving in physical assets. As a percentage of
GDP it had peaked in 2002-3 and has declined since 2003-04. On the other hand, the
public sector has shown a steady increase in capital formation over the past three years,

4
See Bagchi and Nayak (1989), Table 3.

3
though by 2005-06 it had only regained the level of 1999-00. While the data at hand here
cannot be used to determine where in terms of sectors of the economy it is going to, the
rise in public investment is in our view desirable given the low levels of public
investment in India compared to, say, the economies of Western Europe. We now come
to the most dramatic part of the story of capital formation in India in recent years, and the
most striking aspect to the CSO’s estimates that we are currently studying. This has to do
with the rise, and rise, of capital formation in the private corporate sector. Notice, from
the Table 2 again, that investment in this sector has risen by close to a hundred percent
over the last two years. Though stocks have indeed risen at the same time, it may be
verified5 that the greater part of the increased capital formation has been in fixed
equipment. This may be seen as micro-level evidence for the investment boom conveyed
by the aggregate data in Table 2. Further reliability of this estimate is signaled by two
additional pieces of evidence. First, we find6 that output of the capital goods sector has
grown by close to 16 percent in the year 2005-6 and by not much less in the previous
year. Secondly, there is a 62 percent growth7 of imports of capital goods in 2005-6. This
is a very large increase indeed. As an aside, perhaps inevitably, some part of the current
investment boom is spilling over into the rest of the world via the balance of payments.
While the data may indicate an investment boom, it is yet of interest to ascertain
in which sector of the economy the capital formation is taking place. This it is possible to
do with the aid of the data presented in Table 4. It is undoubtedly the case that the largest
magnitude of capital formation is occurring in the manufacturing sector, though the
percentage increase in ‘Community, social and political services’ is large. In agriculture
after a lack-lustre performance for two or three years, capital formation has picked up in
2005-6. Nevertheless, the data in the Table allow us to see this in perspective. Capital
formation in the group ‘Agriculture, forestry and fishing’ is less than that in ‘Transport
and communications’ and ‘Financing and insurance’. For a sector so important, both
intrinsically and in terms of its linkages to the rest of the economy, this represents a gross
inadequacy. Though the slow growth of agriculture is the result of a whole host of
factors, we can see that capital formation must form part of the story. However, the main

5
See Statement 7.1, CSO (2007).
6
‘Economic Survey 2006-7’, Table 7.2: Growth rates of industrial production by use-based classification.
7
‘Economic Survey 2006-7’, Table 6.9: Imports of principal commodities.

4
message from this round of national income estimates is that the manufacturing sector is
the main site of capital formation. The reliability of this estimate is heightened by the fact
of the fast growth of the capital goods sector already referred to and of manufacturing
output as a whole. In a departure from the pattern for the past five years Industry is
growing faster8 than most components of Services and almost as fast as its fastest
growing ones. So the investment boom that we had spoken of is actually a manufacturing
boom. Whether this is getting translated into a faster growth of employment we cannot,
of course, determine from the national income estimates which alone we have to go by
here.

III. Consumption
It is customary among commentators on lately arrived estimates of national income and
its components to focus excessively on the figures for savings and investment, without
much concern for the associated consumption figures, even as the latter are a standard
product of national income accounting. To redress the balance due to this practice a bit
we study the trend in consumption reported in ‘National Accounts Statistics 2007’. There
is a long standing tradition in economics that recognises that economic growth need not
reflect the trend in economic welfare. This tradition views consumption as central, and
suggests that often even a recorded productivity increase could be going entirely to
maintain the capital stock, with nothing left over for increased consumption. The data in
‘NAS 2007’ may be used to shed light on trends in India in recent years. We report two
developments. First, while consumption is growing in real terms, in relative terms private
consumption is losing out to government consumption in recent years. The data is
presented in the lower panel of Table 5. This trend needs to be scrutinized. For instance,
what are these elements of government consumption and are they desirable? The other
trend in consumption that emerges from Table 5 is the declining share of food in the
consumption basket. Note that the decline is approximately 25 percent in the past 5 years,
surely a large figure. Whether this is the standard operation of the Engel Effect or
whether the consumption of food, already at less than adequate levels for the average

8
See ‘Economic Survey 2006-7’, Appendix Table 1.6: Annual growth rates of real GDP at factor cost by
industry of origin.

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household, is being crowded by other expenditure such as on transportation and medical
care - essential for earning an income or maintaining one’s physical capacity for work
intact - remains to be investigated. We want to stress that any observed macroeconomic
exuberance is entirely autonomous of considerations of welfare, and does not make
redundant a purposive study of the latter. Indeed, we believe that policy focus in the last
decade or so has at times privileged a concern for the macroeconomic environment to the
neglect of considerations of welfare.

IV. Conclusion
The data on savings and investment presented in ‘National Accounts Statistics 2007’
recently released by the CSO depict a macroeconomic resurgence marred only by a rising
inflation rate. The figures suggest, in particular, a private investment boom that has lasted
for two years by now. The investment figures are not implausible for there is sufficient
evidence of the same from elsewhere in the economy, such as the rapid expansion of
capital goods production and the searing rise in capital goods imports documented by us.
Further, the data allow us to trace the investment boom to the manufacturing sector,
accentuating our confidence in the estimates as the sector is currently the fastest growing
among all. But the estimates are weakened somewhat by an unacceptably large figure for
‘errors and omissions’ in recent years. This is somewhat unsatisfactory. As regular users
of its indispensable product, we hope that the Central Statistical Organisation will attend
to this matter with alacrity.

V. References
Bagchi, A. and P. Nayak (1989) “Public finance and the planning process” in A. Bagchi
and N. Stern (edited) ‘Tax policy and Planning in Developing Countries’, Delhi:
Oxford University Press.
Chaudhuri, S. (2005) “A note on savings and investment”, ‘Money and Finance’,
January-June, pp. 65-82.
CSO (2007) ‘National Accounts Statistics 2007’, New Delhi: Central Statistical
Organisation.
Oulton, N. (2002),"Productivity versus welfare: Or GDP versus Weitzman's NDP",

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 Working Paper 163, London: Bank of England.
Shetty, S.L. (2006) “Savings and investment estimates: Time to take a fresh look”,
‘Economic and Political Weekly’, February 12, pp. 606-610.

Table 1
Savings
(as percentage of GDP)

item\year 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

Household 21.13 21.03 21.79 22.74 23.77 21.58 22.35
(85.19) (89.85) (92.79) (86.15) (80.11) (69.35) (68.91)
Pvt.Corporate 4.47 4.29 3.74 4.23 4.75 7.15 8.09
Sector (18.01) (18.32) (15.91) (16.02) (16.01) (22.97) (24.93)
Public Sector -0.79 -1.91 -2.04 -0.57 1.15 2.39 2.00
(-3.20) (-8.17) (-8.70) (-2.17) (3.88) (7.68) (6.16)
Total 24.81 23.41 23.48 26.40 29.67 31.12 32.43
Source: ‘NAS 2007’, CSO. Note: figure in parentheses indicates percentage of total.

Table 2
Investment
(gross capital formation as percentage of GDP)

item\year 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

Public 7.41 6.88 6.86 6.07 6.31 7.05 7.41
sector (28.38) ( 8.57) (28.80) (24.29) (23.77) (23.77) (23.05)
Pvt. Corp. 7.35 5.70 5.41 5.92 6.92 9.92 12.89
sector (28.16) (23.69) (22.69) (23.68) (26.05) (33.42) (40.07)
Household 10.55 10.79 10.94 12.44 12.44 11.39 10.67
sector (40.41) (44.83) (45.90) (49.75) (46.84) (38.38) (33.18)
Valuables 0.80 0.70 0.62 0.57 0.89 1.31 1.19
(3.05) (2.91) (2.61) (2.27) (3.35) (4.43) (3.70)
Total 26.10 24.08 23.83 25.01 26.56 29.67 32.16

Source: ‘NAS 2007’, CSO. Note: figure in parentheses indicates percentage of total.

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 Table 3
Savings and Investment in Korea
(as percentage of GDP)

item\year 2000 2001 2002 2003 2004 2005 2006

Gross saving 33.7 31.7 31.3 32.8 34.9 32.9 31.4
Gross saving: 10.6 8 4.7 6.2 7.5 6.3 5.9
pvt. individuals
Gross saving: 11.2 12.7 14.8 15 17.2 16.4 15.1
pvt.corporations
Gross saving: 11.8 11 11.7 11.6 10.2 10.1 10.4
government
Gross domestic 31.1 29.4 29.1 30.1 30.4 30.2 29.9
investment ratio

Source: Korean statistical information system; http://kosis.nso.gr.kr, source cited is Bank

of Korea.

Table 4
Gross domestic capital formation
(Rs. crore at constant, 1999-00, prices)

industry\year 2001-02 2002-03 2003-04 2004-05 2005-06

Agriculture, forestry & fishing 55,806 55,668 53,840 57,253 64,131
Mining and quarrying 8,366 8,383 13,990 13,348 15,230
Manufacturing 103,683 157,018 196,008 290,137 373,616
Electricity , gas and water 42,266 39,237 47,787 45,917 47,629
Construction 15,352 16,705 18,496 16,172 16,869
Trade, hotels and restaurants 22,967 5,413 19,295 20,302 22,092
Transport & communication 58,838 72,609 70,383 80,357 78,676
Financing & insurance 103,516 101,882 101,587 80,363 90,442
Community services 70,831 78,710 81,754 100,335 128,026
Gross capital formation 481,625 535,625 603,140 704,184 836,711
Valuables 13,489 12,930 21,541 33,873 33,992

Source: ‘NAS 2007’, CSO.

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 Table 5
Consumption

item\year 1999- 2000- 2001- 2002- 2003- 2004- 2005-

00 01 02 03 04 05 06
Distribution of final
consumption
Expenditure
Food, beverage & 51.5 47 46.3 43.3 42.1 39.6 39.4
tobacco
Food 45.3 41.3 41.1 37.6 36.7 34.2 33.5
Clothing and footwear 5.3 5.9 5.2 5.2 5 5.3 5
Gross rent, fuel and 11.4 12.5 12.6 12.8 12.5 12.2 11.8
power
Furniture, furnishings, 3.3 3.4 3.4 3.4 3.3 3.5 3.6
appliances and services
Medical care and health 4.4 4.8 5.2 5.7 5.9 6.3 6.5
services
Transport and 13.1 14.4 14.5 15.8 16.9 18.4 19.1
communication
Recreation, education 3.4 3.7 3.7 3.7 3.8 4.1 4.2
and cultural services
Miscellaneous good and 7.8 8.4 9.1 10.1 10.4 10.6 10.3
services
Total 100 100 100 100 100 100 100
Growth of consumption
Private final 7.1 8.9 5.4 10.9 9.4 10.6
consumption
Government final 5 6.3 3.3 6.6 10.3 18.1
consumption

Source: ‘NAS 2007’, CSO.