Indian Economy: High savings rate with low-income and high savings rate with low growth rate

IAS Mains General Studies Sample Answers

Indian economy presents a paradox of high savings rate with low-income and high savings rate with low growth rate. Analyse.

Indian Economy & Saving Rate

For its growth economy requires capital formation. Due to lack of capital formation Indian economical growth has been slow. Gross domestic capital formation is composed of two components. Gross Domestic Saving and Net Capital Inflow from abroad. A country requires to raise its saving rate for higher rate of capital formation as it cannot depend upon loans or debts for a large capital. Though the income has always been low but public has, by not spending a part of their income over the consumer goods and save them and thus raised saving rate in India. It has become a social phenomenon or tradition in India which has led to high savings rate with low income.

The growth rate of Indian economy has been slow since independence. Indian economy has not achieved targeted growth rate during the plans. Mr. Jagdish Bhagvati (1993) explaining the paradox of high saving low growth leading to the phenomenon of declining productivity, mentions: ‘’the weak growth performance reflects, not a disappointing performance, but rather a disappointing productivity performance’’. Enumerating the factors that stifled efficiency and growth, Bhagwati divided into three major groups:

(i) Extensive bureaucratic controls over production, investment and trade;
(ii) Inward looking trade and foreign investment policies;
(iii) A substantial public sector going well beyond the conventional confines of public utilities and infrastructure.

Indian economic policies which has always been self concentrated, without much flexibility, at least, till 1990s has also adverse effects on Indian growth rate. There was 10.2% Domestic Capital formation at the time of the independence, which rose to 27.3% in 1997-98. Thus India has higher savings rate though low income while the higher rate should lead to higher Capital formation and that into high growth rate, but it is not the case.

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