Improving India's Saving Performance

The double task of poverty alleviation and maintaining pace with fast-growing neighbor countries in Asia has prompted the Indian government to announce the target of achieving 7 percent annual growth or more over the next 10 years. Against this background, this paper discusses recent trends in Indian saving behavior and reviews policy options to increase domestic saving. Domestic saving in India shows an uneven upward trend over the past decades, led by rising private saving. Although large errors and omissions in the data complicate the interpretation of recent fluctuations, an econometric analysis of fundamental saving determinants suggests that private saving is likely to continue to rise--albeit gradually--over the years ahead, driven by rising per-capita income and continued financial deepening. However, with public saving at a low level, total saving would most likely not be sufficient to finance the government.s growth target. How could India raise its domestic saving rate? Traditional tax and interest rate incentives are unlikely to lead to a strong response of the private saving rate. Rather, the most promising way to boost domestic saving is through increased public saving and a strong structural reform program, including financial liberalization, which would initiate a virtuous circle in which higher growth would prompt further increases in private saving. The impact of financial sector reform could be potentially large. In India, the link between low growth and inefficient allocation of savings has become increasingly relevant, particularly in the infrastructure sector. Contrary to overall investment, investment in infrastructure has declined in recent years, and worsening infrastructure conditions have become a major obstacle to growth. The lack of long-term financing is a substantial hindrance to such investment, and thus the development of domestic debt markets and the effective use of long-term savngs figure among the highest reform priorities.