The sustainability question is partly linked to a savings/investment issue. Countries that grow at 9 per cent require a savings rate of 35 per cent. The last savings/investment figures (at current prices) are for 2005-06 and they show a savings rate of 32.4 per cent and an investment rate of 33.8 per cent. There are statistical questions of methodology in estimating both savings and investment, but those aren’t major. We have broken away from past trends. Note that when comparisons are made with East Asia, the overall savings figure can be misleading. Household savings rates in India are at par with (and often higher than) those in East Asia. The difference is made by public savings and private corporate savings and these have shot up now. If we can get public savings back to 1960 levels, the Indian savings rate will inch up to 40 per cent.

But even with a savings rate of 34 per cent and an investment rate of 36 per cent, we should next consider the efficiency of capital usage (productivity), measured, say, by the incremental capital/output ratio (ICOR). There are studies floating around suggesting that total factor productivity (TFP) growth in India hasn’t been high enough, say compared to China. However, these drag the time series back to the 1990s and if there has been a structural change around 2002, they suffer from the same extrapolation problem. They don’t factor in efficiency improvements due to IT use or competition or improved transport (not just roads) connectivity. Incidentally, what is India’s ICOR now? It is probably assumed the ICOR is around 4, in which case an investment rate of 36 per cent should get us growth of 9 per cent. But in December 2005, the National Development Council (NDC) talked of reducing the ICOR to 3.58. If that has happened, an investment rate of 36 per cent gets us growth of 10 per cent. In any event, TFP is measured after netting out labour and capital input contributions to growth. It is perfectly possible that at this stage of development, India’s growth is driven by labour (higher work participation rates, lower dependency ratios) and capital (domestic and foreign savings) and there is nothing wrong with that. The point to note is higher savings/investment rates converging towards East Asian trends. This should knock one element out of the non-sustainability argument.

... contd.