Low Savings, High Real Interest Rates: Is India’s Economic Growth Sustainable?

India continues to be one of the fastest growing economies in the world, but its sustainability looks questionable, with government borrowing growing faster than domestic savings.

Gross household financial savings, net of financial liabilities, continue to grow more slowly than net central and state government borrowing plus extrabudgetary resources (EBR). The gap between the two is funded by external sources, according to a recent report by India Ratings and Research, a unit of Fitch Ratings. The phenomenon has the potential to run the risk of a wider current account deficit and other associated consequences, according to the report.

“Household gross financial savings net of financial liabilities increased to Rs 11.29 trillion in FY18 from Rs 6.43 trillion in FY12 (CAGR: 9.8% ). However, net borrowing by Central Government, State Government and EBR increased to Rs 11.55 trillion in FY18 from Rs 6.28 trillion in FY12 ( CAGR of 10.7%),” India Ratings said.

In addition, high real interest rates in the economy despite RBI rate cuts are also threatening growth prospects and will keep 10-year government securities (G-Sec) yields at relatively high levels. .

The fall in household savings despite the high real interest rate prevailing in the economy was also highlighted by a report released by Kotak Securities last month. According to the report, the household savings rate fell to 17.2% in FY18 from 22.5% in FY13. This can be attributed to weak employment opportunities, to continued high consumption and rising household financial liabilities over the past five years, according to the Kotak report.

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There is a need to improve the ratio of gross household financial savings net of financial liabilities to net central and state government and RBA borrowing, according to India Ratings and Research. This would require either a rise in the former or a fall in the latter.

Although India can rely on foreign funding to meet the government’s borrowing and investment needs, greater reliance on external funding has its own problems, such as the fickle nature of REIT, which can be quite destabilizing for the economy, the report adds.

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