Figuring it out

GDP numbers confirm the economic downslide — and point to the urgency to restore confidence

It is possible to describe the management of savings by Indian households, 2010 onwards, in two ways. One, with the help of the data released on Thursday by the ministry of statistics on the final GDP numbers for 2011-12, which shows that gross savings of the economy dropped from 34 per cent to 30.8 per cent in just one year. This is akin to erasing a decade's progress in savings to go back to 2003-04 levels. The same story can also be told through the remarkable spike in demand for gold, as Indians fled financial sector papers.

The Prime Minister's Economic Advisory Council has pointed out that savings had shot up as the government improved its fiscal management till 2007-08. A shrinking deficit allowed less space for inflation, which gave households the confidence that the value of their savings would be protected. The expansion of the fiscal deficit since then, however, has wiped out half of the gains in savings, the document points out. The latest data would indicate that developments in the economy up to 2012-13 have wiped out the other half of the gains too. This is the damage that profligate government policies, ostensibly to shore up various social entitlements, have wreaked on the economy. The extent to which these could be reversed soon is questionable. In all probability, it will be some time before confidence is restored to households so that they can make the switch from gold back to financial sector papers. A low savings rate means that it finances a lower percentage of the investment rate, leaving the difference to be made up from abroad as foreign investment in the stock market or as direct investment in different sectors.

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