The tumble in India’s savings rate needs to be reversed

livemint.com:

macroeconomic crises and business cycles. Even zero growth needs basic savings and investment to sustain a constant output. Two questions arise.

First, just how much should one save? Too much savings may lead to diminishing returns. There is thus a golden ratio. Besides, if the bulk of savings can come from foreigners, then the domestic population can enjoy a higher consumption level or standard of living.

But you can’t borrow indefinitely from the world. Optimal domestic savings is a must. Second is the question whether savings cause income growth or vice-versa.

Higher income makes higher (absolute) savings possible. And higher savings lead to higher growth and income. This two-way relationship has a chicken-and-egg element.

Yet, macro policies mandate that higher savings are a prerequisite for high growth. Much of the East Asian long-term miracle growth was predicated on a high savings rate. In some countries, it has been coercive, with high compulsory savings for pensions.

Savings rates have peaked at 50% in China. The flip side of such high and ultimately wasteful savings is that consumer spending as a proportion of GDP is rather low. In China, it was stuck at 35% for a long time, while in India it has been above 65%.

India’s savings rate climbed steadily from below 10% during the 1960s to a peak of 37% in 2010-11. During 2004 to 2012, it was close to the optimal ratio. A combination of high savings, high growth, high tax collections, lower deficits and low interest rates was the virtuous cycle enjoyed by India during the first decade of this century.

Then irrational exuberance took over. This led to over exposure to large risky loans in infrastructure and policy paralysis. By 2013, we were in taper-tantrum