> Here's what the World Bank's World Development Indicators database
> has to say. Average annual growth rate in per capita GDP for SA,
> 1994-2004, in constant rand: 1.2%. If you use 1990 as the base
> year,
> the performance is much worse: 0.3%. Since 1990 and 1994 - base
> year
> doesn't matter much here - investment has averaged under 17% of
> GDP;
> for China, it's been 39%; India, 23%; and the US, 18%. So, SA is
> investing less than a rich mature economy when it should be
> investing
> more like China & India.
India's current investment rate is estimated at about 27% of the GDP. The following article "Providing the fuel to accelerate growth" by Saumitra Chaudhury provides the background.
Ulhas
The Financial Express http://www.financialexpress.com/
Monday , February 20, 2006
TODAY'S COLUMNIST
Providing the fuel to accelerate growth http://fecolumnists.expressindia.com/full_column.php?content_id=118110
Saumitra Chaudhury
Some weeks back, the Central Statistical Organisation (CSO) released detailed national income statistics with the new base year of 1999-2000. The most salient feature of the new data was related to savings and investment. Domestic savings in 2004-05 is estimated at 29.1% of gross domestic product (GDP) and the investment rate at 27.2%. Both numbers are a major structural break from the immediate past. For over a decade, both the domestic savings and investment rate had hovered around 23%-24% of GDP-except in the case of investment for a few years in the mid-1990s. Pushing for higher economic growth in a developing nation invariably entails an increase in the investment rate-to build the infrastructure and factories that can permit the citizenry to increase productivity. This task has been a challenge from the early days of Independence.
The investment rate in the early 1950s was around 9%. With considerable effort this was progressively raised, and averaged 15% in the two decades since the mid-1950s, eventually approaching 20% by the end-1970s and 24% by end-1980s. The domestic savings rate, however, faltered. In the early 50s it had been, like investment, at 9% of GDP. In the two decades after the mid-1950s, the savings rate averaged 13% and it was not till the end of the 1980s that, on a sustained basis, it stepped past the 20% level. When investment exceeds domestic savings, the difference is financed by foreign savings, which is equal to the current account deficit (CAD).
However, there is a limit to the level of CAD an economy can hope to sustain, especially when it is debt financed. Which was indeed the case with us, even if much of it was cheap development finance. Besides, we had also chosen a relatively autarchic policy path, which was intrinsically hostile to trade liberalisation, limiting in another direction the extent to which the economy could absorb foreign savings, especially private capital flows. Thus, through the 50s, 60s, and 70s, we ran a CAD of 2-3% of GDP, which was almost entirely financed by inflows of foreign aid. And, of course, that had its own quasi-political accoutrements. In the 80s, part of the CAD began to be privately financed, but it was mostly debt in character and some of it was unstable ("hot"). Only since the 1990s has our CAD been entirely financed by private capital flows, mostly by way of foreign investment. Aid flows (it's not called aid these days, but that's another matter) is relatively insignificant.
In short, while running a CAD is fine for a developing economy, it is the level of domestic savings that finally constrains the magnitude of investment that can be sustained. To put some numbers on it, suppose a CAD up to 2% of GDP is considered to be sustainable (given expected rate of growth, buoyancy of export earnings and the level of external debt), then the rate of domestic investment that can be sustained will be this 2% plus the domestic savings rate. Which is why the increase in the rate of domestic savings to nearly 29% of GDP is such undiluted good news.
[. Both, the savings and investment rate numbers mark a major structural shift . Over half the improvement in savings is from better govt revenue balances . The challenge of using resources efficiently, with imagination, lies ahead]
In January 2005, the CSO indicated that savings had crossed 28% in 2003-04. That news, however, was greeted with considerable scepticism, for there are some who are so caught in the cobwebs of their ideological pre-judgements. So much so that, very ironically for these most honourable gentlemen, good economic news often times tastes sour. Much was made about the size of the 'errors & omissions' term and the impact that foreign portfolio investments might have had on domestic asset prices. Institutions of the government were not an exception to this scepticism. In January 2006, the estimate for 2003-04 has been revised marginally upwards, the one for 2004-05 placed at over 29% and the 'errors & omissions' term is quite modest in both years. Little doubt should now remain on this score-but perhaps one is being an excessive optimist.
Extremely pertinent is what drove the increase in the savings rate. Well over half of the improvement came from better revenue balances of government (Centre and states). The revenue deficit is equal to the government's (negative) savings. This figure had bottomed out at (-) 6.0% of GDP in 2001-02, since when it has been on the mend, to 3.7% in 2003-04 and then to 2.5% in 2004-05. The balance of the improvement came from private corporates and the household sector, which includes unincorporated business. We have had a significant increase in the rate of economic growth in recent years. To exclude the weather-induced vagaries of agriculture, for the moment let us stick with GDP growth in the non-agricultural sector (industry and services). Non-agricultural GDP had grown by 5.8% in 2000-01 and by 5.6% in 2001-02, i.e. an average of 5.7%. This improved to 7.2% in 2002-03, then to 8.0% (2003-04), then to 9.5% (2004-05) and in the current (2005-06) fiscal, to 9.6% (as per Advance Estimates). During 2003-04 and 2004-05, the data also tells us that private corporate investment (at constant prices) increased by nearly 30% annually and public investments rose by around 10% annually.
The line that passes through improving government revenue balances, higher investment and faster economic growth is a thick one, especially when we consider the sharp rise in bank credit in the past several years-which is rather difficult when the government is busy gobbling financial resources. There indeed are other factors that have also been at play here, such as stronger corporate and bank balance sheets and their improved capacity to conduct business efficiently. Finally, with domestic savings close on 30% and, therefore, prospectively a sustainable investment rate of over 32%, the final conventional hurdle on the path of accelerating growth is behind us. What lies ahead is the challenge of using these resources efficiently and with imagination.
The writer is economic advisor to Icra
© 2005: Indian Express Newspapers (Mumbai) Ltd.