Can India Attain the East Asian Growth

with South Asian Saving Rate?

Deepak Mishra
The World Bank
 Outline of the Presentation
) Motivation
) Convergence: growth, saving and
investment rates?
) Evolution of India’s Savings and Investment
) Empirical explanation
) Squaring up India’s saving and investment
rates with its pattern of growth
 Motivation
GDP Grow th Rate (in %) : Selected East Asian Countries and India
The Indian economy has 10 9.7

been growing at around 6% 8

7.0
during the past two decades 6.9
6.2 6.1
5.8 5.6
6

It is expected to grow at 2

nearly 8% in the 2003/04- 0

China (1978- India (2003- Ko rea, Rep. Indonesia M alaysia(19 Thailand India (1980- Japan (1966-

2006/07 period and aspires 2004) 06) (1981-2004) (1980-1997) 81-2004) (1981-2004) 2004) 1991)

to continue to grow at 8%+ Gross Dom estic Savings/GDP (in %) :

Selected East Asian Countries and India

in the medium-term 40 37.4 37.3

34.3 33.8
35 31.8 31.3
30

25 22.3

Is India’s growth aspiration 20

15

consistent with its saving 10

and investment rates? 5

0
Malaysia(1981- China (1978- Japan (1966- Korea, Rep. Indonesia Thailand (1981- India (1980-
2004) 2004) 1991) (1981-2004) (1980-1997) 2004) 2004)
 Convergence in growth, but not in the
saving and investment rates
12 R e a l G D P G ro wt h R a t e ( in %) 50 G ro s s D o m e s t ic S a v ing t o G D P ( in %)

45
10 East A sia
East A sia 40

35
8
30 new series
6 25
India P ro jectio ns* India o ld series
20
4
15

2 10

5
0 0

A large part of the convergence is due to growth deceleration in East Asia and a
smaller part is accounted by the recent acceleration in India’s growth rate

The difference in the investment rates between the two regions has historically been
wider than the difference in their saving rates, though this has changed after 1997
 The Speed of Convergence:
Results from Panel Fixed Effect Regressions
Dependent variable Main explanatory var. Coefficient t-Stat. Adjusted R2 No. of obs.

(β )
^

Growth rate of per capita income Time Trend -0.005*** -6.25 0.59 36

Gross Domestic Saving/GDP Time Trend -0.003** -2.05 0.14 52

Growth rate of per capita income Initial per capita income -0.029*** -4.83 0.49 36

Gross Domestic Saving/GDP Initial per capita income -0.014* -1.76 0.07 36

* Including India in the panel

Dependent variable Main explanatory var. Coefficient t-Stat. Adjusted R2 No. of obs.

(β )
^

Growth rate of per capita income Time Trend -0.006*** -6.74 0.63 30

Gross Domestic Saving/GDP Time Trend -0.004** -2.10 0.17 43

Growth rate of per capita income Initial per capita income -0.031*** -4.58 0.48 30

Gross Domestic Saving/GDP Initial per capita income -0.018* -1.94 0.12 30

* Excluding India from the panel

 India’s Saving and Investment rates:
Variations Over Time
35 India's Saving and Investment (% o f GDP ) 10% India's B alance o n Current and Capital A cco unts and
Internatio nal Reserves (% GDP )
8%
30
6%
25 4%

2%
20
0%
15 structural breaks?
-2%

10 -4%
Capital A cco unt
-6%
Change in Intl' Reserves
5
Capital Fo rmatio n Saving -8% Curent A cco unt
0 -10%

Steady increase from extremely low bases

They are highly correlated (correlation coefficient is 0.97)
A possible break in the trend growth rate of investment in the late-1980s and a
similar break in the savings in the mid-1990s
Is Indian economy becoming more financially integrated with the rest of the world?
 India’s Saving and Investment rates:
Composition
25 India 's S a v ing by S e c t o rs ( % o f G D P ) 25
India 's Inv e s t m e nt by S e c t o rs ( % o f G D P )

20
Ho useho ld 20
P ublic
15 P rivate Secto r
P rivate Co rpo rate
15 P ublic Secto r
10
1976-77 =4.9
10
5

1986-87 =11.2
5
0

2001-02 =-2.2
-5 0

Growing divergence between the public and private savings

Household savings high, but signs of plateauing; corporate savings low, but is
steadily increasing
Public and private investments seemed complementary in the past, but substitutes
in recent years
 India’s Saving and Investment rates:
From an International Perspective
50 G ro s s D o m e s t ic S a v ing / G D P ( in %) 30 S a v ing / G D P ( in %) ; 19 9 0 - 9 6 *

45 Co rpo rate
43 44 25
40 41 41
Ho useho ld
20 14 3
35 35 36 35 11
17
32 31 32
30 30 30 30 30 15 13

26 26 27
25 25 16
23 23 10 19 11
22 22
20 19 13 13
18 5 9 9
15 2000s 1990s 1980s 1970s
3 4
10 0
India Indonesia Thailand Korea, Malaysia China Ko rea Japan Taiwan Thailand India P hilippines US
Rep.

India’s current saving rate is lower than what the five East Asian countries had
achieved by the 1980s
India has one of the highest household saving rates and lowest corporate saving
rates in the world.
 India’s Saving and Investment rates:
A Comparison with China
25 H o us e ho ld 25 E nt e rpris e / P riv a t e C o rpo ra t e 25 P ublic S e c t o r

20 India 20 20
China
15 15 15
China
China
10 10 10
India
5 5 5 India

0 0 0

-5 -5 -5

In China, household savings to GDP ratio has fallen in recent years. In India, it
also fell in 2004/05.

A whopping 15-18 percentage points difference between the enterprise saving in

China and the private corporate saving in India.

Possible explanations: measurement issues; tax structure.

 Demography and Savings
(Percentage of working-age population in the total population)
75
2010
2015

70 2025 India
2035
2010
2035 M alaysia
65

Indo nesia

60
Thailand

55 China

Ko rea
50

45

India is favorably positioned to generate and sustain a high level of saving rate for
a longer period of time than most countries in East Asia

Is India’s demography trend an opportunity or a liability?

 Financial Depth and Savings
50

45 M alaysia
40
China
35

30
Thailand
25

20 Ko rea

15
India
10

5
Do mestic credit to private secto r (% o f GDP )
0
0-5 10-15 20- 30- 40- 50- 60- 70- 80- 90- 100- 110- 120- 130- 140- 150- 160-
25 35 45 55 65 75 85 95 105 115 125 135 145 155 165

In East Asia, higher saving rate and increased deepening of financial sector has
gone hand in hand

The relationship between financial depth and savings depends on the treatment of
“consumer durables” in the national income accounts
 Empirical Estimation
Dependent variable: Gross Domestic Dependent variable: Gross Domestic
Saving/GDP Saving/GDP
Explanatory Var. Coefficient t-Statistics Coefficient t-Statistics
Constant -46.24** -2.27 -46.29** -1.96
Time Trend 0.36*** 3.91 0.17** 2.03
Lagged Dependent Variable 0.22 1.34 0.29* 1.75
Public saving/GDP 0.67*** 2.98 0.49*** 2.22
Reform Dummy -1.92*** -3.04 -0.86 -1.10
Share of working age population 0.88*** 2.36 0.92*** 2.14
Domestic Credit/GDP (-1) -0.09* -1.64 0.02 0.26
GDP growth rate (-1) -0.02 -0.32 0.03 0.38
Adjusted R square 0.95 0.91
Durbin-Watson stat 1.71 2.02
No. of observations 44 44

Trend stationary vs. non-stationary

The coefficient of public savings to GDP ratio and the share of working age
population in total population are both positive and significant
The coefficient of the reform dummy and the domestic credit to GDP ratio are both
negative and significant
 Forecasting India’s Saving and
Investment rates
36
(% of GDP) Investment
34

32

Savings
30

28

26

24

22
A ctuals P ro jectio ns
20
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Underlying assumptions
Public saving to GDP ratio to increase by 0.5 percentage points each year until it
reaches 5 percent and remains constant thereafter;
Domestic credit to GDP ratio increases by 5 percentage points each year
GDP growth is assumed to be constant at 8 percent.
 India’s Pattern of Growth and
Factor Intensities
(Capital-output ratio across major sub-sectors)
(% of GDP)
Electricity,gas and Water supply 11.4
9.0
4.0
M anufacturing 3.9

Financing, insurance, real estate and business services 5.1

3.0
2.7 1993-94
Gro ss do mestic pro duct 2.1 2004-05
Co mmunity, so cial and pensio n services 2.9
2.1
3.7
M ining & quarrying 2.1

Transpo rt, sto rage & co mmunicatio n 3.5

2.0
1.4
A griculture 1.4

Trade,ho tels and restaurants 1.0

0.5
0.5
Co nstructio n 0.3

Between 1993-94 and 2004-05, (net) capital-output ratio fell in all sub-sectors

Some of the largest declines were recorded in the services sector

 India’s Pattern of Growth and
Factor Intensities
(Capital-output ratio vs. sectoral growth rate)
(% of GDP)
20%

Real estate,o wnership o f dwellings and business services

16%
Gro wth rate in current prices

12%

Secto ral inflatio n rate

8%

4%
Gro wth rate in current prices

X axis: Capital-Output Ratio

0%
0 1 2 3 4 5 6 7 8 9 10

Faster growing sub-sectors in the Indian economy have lower capital-output ratio
than the slower growing sub-sectors
India’s growth generating process has been less capital intensive than would
have been the case had India relied on manufacturing-led growth
 Factor intensities and Capacity Utilization
from an International Perspective
4.0 C a pit a l O ut put R a t io (% of GDP) Average utilization rate of installed
productive capacity in industry in 2003/2004
Thailand
3.5
• United States 77% (Federal Reserve
measure)
M alaysia
3.0 • Japan 83-86% (Bank of Japan)
• European Union 82% (Bank of Spain
Ko rea estimate)
2.5
• Australia 81% (National Bank estimate)
•
China
Brazil 60-80% (various sources)
2.0 India • India 70% (Hindu business line)
• China perhaps 60% (various sources)
• Turkey 72.5% (July 2001; Statistics
1.5 Bureau)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 • Canada 87% (Statistics Canada)

India’s lower capital-output ratio reflects higher productivity as well as more

intensive use of its existing capacity as shown below
 Summarizing the Main Results

) While India’s GDP growth rate is slowly converging to the

East Asian level, its savings and investment rates are not.
) India’s domestic saving and investment rates show that
they are likely to register only moderate increase in the
medium term and are unlikely to reach the level seen in
East Asia.
) India therefore has to rely on more productive use of its
capital stock (and complement it with greater
accumulation of human capital) and on external sources to
finance its emerging investment-saving gap.
) Prudent fiscal outcomes and sectoral reforms to attract
moderate level of external capital will thus be critical
 Extending the Idea Further:
Future Research

) Separate estimation of household, corporate and

public sector saving functions

) More appropriate specification of the investment

function

) Further investigation on measurement issues,

especially with respect to corporate savings

) Examination of India’s pattern of growth using firm-

level data