This, however, is not surprising given that India has been experiencing stubbornly high level of inflation for an inordinately long period of time. During this two year period, India’s average monthly y/y inflation was 9.24%. As a result, real interest rates on bank deposits and various other savings instruments including small savings remained very low. In fact, for PPF (Public Provident Fund) the real rates have been negative. Not surprisingly, there has been an absolute decline in investment into small savings, while growth in household savings in bank deposits, currency and life insurance remained highly muted. On the other hand, high inflation has resulted in increased demand for gold, as a hedge against inflation. As per the report, post the global crisis, share of valuables in India’s nominal GDP has increased from 1.3% of GDP FY09 to 2.8% of GDP in FY12. The surge in gold imports during FY12 has resulted in India’s CAD rising to 4.2% of GDP. As per the RBI data, during FY12, out of India’s CAD of US$78.2 billion, gold import was to the tune of US$60 billion. As per the national accounting standard, however, splurging in gold is not considered as saving but consumption. Hence, given the increased allocation of disposable income on gold and continued incidence of high rate of interest, one can expect an adverse impact on household’s investment in physical assets.
Not only household savings, we expect private corporate savings and public sector savings to have also taken a hit. With clearly visible demand destruction, Indian corporate sector lacked pricing power on the face of high inflation, which would have led to muted growth in their savings. Also, public sector saving is expected to have taken a hit; given that India’s fiscal deficit during FY12 exceeded the target of 5.1% of GDP by nearly 0.7%. Overall, India’s savings rate for FY12 is likely to be below 30% of GDP, the lowest since 2002.
However, it is possible that the preliminary estimate of India’s expenditure side GDP (nominal) maybe revised downward, since the data appears suspect. According to the RBI annual report, new investments in large projects have experienced a decline of nearly 50%, led primarily by a dip in investments the infrastructure and metals sectors. Despite this, as per government of India data, Gross Capital Formation (GCF) or Investment during FY12 was as much as 35.5% of GDP, merely 0.3% lower than FY11 investment to GDP ratio of 35.8%. Given that the CAD was 4.2% of GDP during FY12, the savings rate should be ~ 31.3% of GDP, which is unlikely. In case of such a downward revision, India’s saving rate may actually end up being a little above 30%.